Wednesday September 13 2017

Application of Shari’ah contracts in banking

By Dr Lujja Sulaiman

Contract (aqdu) is one of the fundamental transactional (muamalat) theories in Islam after ownership (milkiyyah), property (mal), and right (haqq). What makes Shari’ah contracts unique are the pillars (arkan) and conditions (shuruk) that describe the pillars of a valid contract. Each contract should have pillars which must also fulfil necessary conditions.
Shari’ah contracts take different forms, that is; verbal (lisan) which are the original form of Shari’ah contracts, written (kitabah) which are recommended whenever debt is involved, signs (isharah) which are permitted where the price is a small amount of money.

Most often, the Arabic terminologies for shari’ah contracts are used for clarity and originality, just like the case for Latin phrase ceteris paribus in economics, among others. Shari’ah contracts are applied to acquire permissible financing for homes, automobiles, and personal financing, among others. Islamic banking does not come along with new contracts all the time. Except the notable ones that conflict with Shari’ah, Islam banking would accommodate certain conventional financial contracts upon approval of the bank Shari’ah advisory board.

Forming Shari’ah contract
A contract (aqdu) is a combination of offer and acceptance which leads to legal consequences on the subject, resulting in a binding obligation upon the contracting parties. Underlying all Islamic financial transactions, there must be fulfilment of pillars of Shari’ah contracts in order to ensure validity of a transaction instead of the immediate enforceability of its legal form. These pillars include;

i) Contracting parties. Oftentimes, the contracting parties are human beings. However, companies may also enter into a contract because they have legal personality status. The contracting parties must possess legal capacity to offer or accept the offer.
ii) Offer (ijab) and acceptance (qabul). These are expressions made by the contracting parties to declare their willingness to undertake a contract.

iii) Subject matter of the contract. This means the contractual object upon which the legal rulings and effects of the contract are fulfilled, that is; goods or services. The subject matter must fulfil certain conditions such as; its existence at the time of conclusion of the contract, conclusive determination and full knowledge of it, certainty of its delivery and its permissibility in the eyes of Shari’ah.

iv) Consideration. This includes the price of the subject matter which must be determined and mutually agreed upon by the contracting parties at the time of contract.

Dr Lujja Sulaiman,
Tropical Bank Limited

Article is sponsored by
Tropical Bank to help understand Islamic Banking.